In proceedings such as misfeasance, mere negligence on behalf of Directors is not sufficient to establish dishonesty on their part: Karnataka HC

Read Judgment: VAISHAK INTERNATIONAL LIMITED vs S.V DIKSHIT 

Pankaj Bajpai

Bengaluru, October 26, 2021: The Karnataka High Court has observed that in the proceedings such as misfeasance, mere negligence on behalf of the Directors may not be sufficient, but something more needs to be established to reflect dishonesty on the part of the Directors.

The background of the case was that the Directors (respondents) had committed lapses in the course of conduct of affairs of the company. It was asserted that the total misfeasance claim amounted to Rs. 4,98,454 alongwith interest @ 18% p.a. 

The respondents however denied the averments while contending that as regards to the claim of mismanagement with respect to the assets amounting to Rs. 1,62,470 as shown in the Balance Sheet, it was pointed out that the assets were not in good condition and the local creditors who had dues had taken over these items which was even prior to the filing of Company Petition. 

It was submitted by the respondents that the economic distress of the Company was attributable to the business loss, as Gherkins crop had failed and many of the agriculturists who had received the money as advance from the Company failed to keep up their commitment. 

After considering the averments and the objections, the Bench of Justice S. Sunil Dutt Yadav, noted that in the proceedings such as misfeasance, mere negligence on behalf of the Directors may not be sufficient, but something more needs to be established to reflect dishonesty on the part of the Directors. 

The High Court further noticed that the nature of proceedings are such that it has a flavour of penal proceedings and any order passed would reflect as an indictment of the Directors which requires to be established by cogent evidence placed by the Official Liquidator. 

It is also to be noticed that the assertions in the application pointing out the discrepancies would by itself not be sufficient unless the same are established through evidence, added the Court. 

In the present case, there has been explanation by the respondents with respect to each of the item of query and the explanation that there has been business loss resulting in the eventual closure of the Company as made out by the respondents which has led the present state-of-affairs, has been placed as an explanation by way of evidence, added Justice Yadav. 

After perusal of the entire material on record, Justice Yadav found that there was no dishonest intention as such by the Directors and the respondents had put forth their explanation as regards each of the discrepancies pointed out by the Official Liquidator. 

The explanation, if taken note of, would be sufficient to establish the defence and a positive direction to the respondents to make good the deficiencies as alleged and as asserted by the Official Liquidator is not called for, concluded the High Court.